Robustness of demand for money analysis in Vietnam: a time-varying cointegration approach

Abstract

In empirical macroeconomics, there has been increasing interest in exploring determinants and validity model estimation of demand for money. Among them, the issue of stability has been recognized complicated due to many factors such as different opportunity cost variables, transforming economy process, financial innovation regime, and model estimation. This paper focuses on analyzing the money demand in Vietnam in the period Dec 2003 through Feb 2016. Using a time-varying cointegration approach, which is expected to overcome structural change and economic cycle, we can provide a more precise conclusion for the elasticities of money demand. This method allows evaluating some proxy variables to perform a possible model under considering the mentioned cointegration. The main findings figure out income positively affects money demand even when changing the proxy of opportunity cost variables. The scope of interest rate elasticity is overestimated when missing stock price, real exchange rate and consumer price index in the model estimation. However, it is significantly negative with money demand. Other favorable findings are the positive stock price and the negative real exchange rate effects on money demand. By empirically studying, this research shows the time-varying cointegration method can strengthen the robustness of demand for money analysis in Vietnam.